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Know your risk profile

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Know your risk profile

Understanding your risk profile is essential for sound financial planning. Every investor has individual attitudes and tolerances regarding the risks they take on with their investments. A risk profile allows you to understand your willingness to take risks for potential returns. It forms the basis for selecting a suitable investment strategy and corresponding products.

What does risk mean when investing money?

The risk associated with an investment describes the possibility that an investment will not achieve the expected return or may even result in losses. An example of this is price risk in the stock market: Markets and the value of investments can develop negatively, for instance, if a stock price falls due to political events, leading to losses. Another risk is interest rate risk with fixed-income investments: If interest rates rise, bond prices fall, which can also lead to losses.

Risks are an unavoidable part of any investment. It is crucial to understand the risk and manage investments strategically. A well-diversified portfolio can help spread risks and reduce potential losses.

The risk profile

Every investor's risk profile is unique. It describes their personal willingness to take risks when investing. Understanding your own risk profile is essential for managing your investments, as it determines the choice of investment strategy and suitable products.

The key question here is: How much risk am I willing to take to achieve a higher return? It's about determining how much fluctuation and uncertainty you can tolerate in your investment. While some investors are prepared to take on higher risk for a greater return, others prefer lower-risk investments because they are concerned even about small fluctuations.

Another important aspect of the risk profile is risk tolerance. This refers to an investor's ability to withstand financial losses. This depends heavily on their personal financial situation, income, and the general economic climate. Investors with a stable financial background are generally better able to cope with losses and therefore have a higher risk tolerance.

Risk appetite vs. risk capacity

It is important to distinguish between risk appetite and risk capacity. While risk capacity is an objective factor derived from an investor's financial situation, risk appetite describes their personal attitude towards risk. It is more influenced by an investor's emotional reactions to uncertainty.

What risk profiles exist?

The most common risk profiles can be divided into five categories:

Conservative
Suitable for investors who do not want to risk major losses and depend on their savings.
Investors with a conservative risk profile prefer safe investments and aim for minimal risk. High returns are less important to them, as long as their capital is invested safely.

Investment focus: Fixed-interest securities and bonds, fixed-term deposits, overnight money, pension funds.

Risk aversion
Suitable for investors who are willing to take minimal risks and tolerate low price fluctuations, but still prefer security.
The risk-averse investor values secure investments and strives for consistent, albeit rather low, returns. They prefer quick access to their capital.

Investment focus: Bonds, safe stocks and funds.

Balanced
Suitable for investors seeking both security and growth and opportunities.
Investors with a balanced risk profile seek a balance between security and growth potential and are willing to take on moderate risk in order to achieve a higher return.

Investment focus: A balanced mix of bonds and stocks, funds and ETFs.

Opportunity-oriented
Suitable for investors who focus on high returns, can accept price fluctuations and financially cope with losses.
The opportunity-oriented investor has a high risk tolerance and is particularly interested in growth potential. They accept significant price fluctuations and prefer short-term investments.

Investment focus: Stocks, ETFs, currencies, volatile markets and growth-oriented companies.

Aggressive / Highly speculative
Suitable for investors who are willing to take a high risk to achieve the highest possible returns and do not need to rely on their savings.
The aggressive investor takes on maximum risk to achieve the highest possible return. Even a total loss is accepted, as maximizing the return is the primary goal.

Investment focus: Highly volatile markets and investments such as stocks, commodities, and specialized funds.

Each risk profile represents an individual balance between risk and return. These descriptions can serve as a guide, but do not replace personal financial advice.

How to determine your risk profile

Your professional and financial situation determines how much risk you can afford, while your personal risk tolerance defines how much risk you are willing to take. The following questions will help you determine your individual risk profile.

1. How much risk can you take?

First, you should determine how much risk you can afford. Your personal risk tolerance depends on the following factors:

How much money do you have? The more money you have saved, the less dependent you are on your investments. You can better absorb losses.
How secure is your income? A secure income allows for a higher risk tolerance.
How much debt do you have? If you have high debts, such as a mortgage, paying off your loan should take priority.
How long do you want to invest? A longer investment horizon, for example until retirement, allows you to take on more risk, as you can offset losses over the long term. For shorter periods, your investment strategy should be less risky.

2. How much risk are you willing to take?

To determine your personal risk tolerance, ask yourself the following questions:

Are you willing to take risks for the sake of returns? Consider whether security or return is more important to you, and how much risk you would be willing to take for higher returns.
Can you tolerate a temporary loss? Could you live with losses without getting nervous, or would you have sleepless nights if your investment temporarily lost value?
Are you prepared to hold onto an investment despite temporary losses? Can you remain calm and stick to your decision, even when the markets fluctuate?

Personal risk tolerance depends primarily on the first step, as the objective ability to cope with losses is often determined by one's financial circumstances.

3. Your risk profile

By answering the questions, you can define your personal risk profile. Your investment strategy and portfolio will be built based on this profile. Whether you are conservative or risk-tolerant, it's important to diversify your investments. Here, we explain the three pillars of successful investing.

Determining your risk profile involves a self-assessment, an evaluation of your financial situation, and a clear definition of your goals and desires. Keep in mind, however, that your risk profile can change over time. Changes in your life or financial circumstances can influence it. Therefore, it's important to regularly review your risk tolerance and capacity and adjust your portfolio accordingly.

4. Expert consultation

If you are unsure or would like a detailed analysis, we recommend consulting a financial expert. Our BK advisors can help you determine your risk profile based on your personal circumstances and provide you with tailored investment recommendations.